In March 2013, Gao Xiaosong – a famous Chinese music composer, producer and TV talent judge – announced that on 1st July of the same year “the Chinese online music market will step into an era of legal copies”. Of course, the 1st July came and went and nothing much seemed to change. While the statement can be written off as hyperbole, Gao Xiaosong was directly referring to a number of positive behind-the-scenes changes in the Chinese digital music landscape that could best be described as a number of glaciers aligning. Here are a few of the many factors at play.
1. Lots of people online doesn’t necessarily mean huge revenues for music
As of December 2013, the Chinese internet userbase stands at 618m, a growth of 9.5% on the previous year, bringing penetration to a humble 45.8%. The mobile internet population broke the 500m mark, growing 19.1% from the end of 2012.
Big numbers, for sure, but it is perhaps more telling that the China Internet Network Information Center (CNNIC) – a government-backed internet administrative body and the source of the numbers quoted above – characterises the next phase of internet development as being a move from “quantity” to “quality”. In the rush to scale, we are left with a shoddily regulated ocean of copyright infringement, black box accounting, fictional traffic numbers and general mistrust between the content providers, service providers and advertisers.
In the midst of the confusion, the casual netizen has been the beneficiary of a completely free and frictionless relationship with digital content, engendering a deep-held expectation that it will ever be thus. So, while it is cause for great optimism that 73.4% (source: CNNIC) of Chinese netizens use the internet to consume digital music – the fourth highest use of the internet after instant messaging, news and search, yielding a digital music audience of a little over 450m – there is still some way to go before this audience starts to pay its way.
Case in point: the IFPI reported China’s 2012 digital trade revenues were $75.5m – an 82% digital market – up from $64.3m the year before. Domestic rights owners report the numbers to be higher than this, but we are still talking a few US cents of ARPU.
2. A new understanding of the consumer could reap long tail rewards
Up until fairly recently, China was understood to be a hit-driven music culture in which hit songs were used as a cultural currency that enabled people to blend in with their peer groups. Music services would routinely only present their catalogues as charts of Top 200 Male Singers, Top 200 Female Singers, Top 100 J-Pop Songs and so on, with failure to make it into these charts almost guaranteeing anonymity in the poorly curated non-chart netherworlds.
In the last few years, however – thanks to internal user surveys at the major DSPs showing that the majority of their audience “do not care what they are listening to” – this perception has changed. What appears to be a depressing lack of engagement with music is probably better read as being a pervasive lack of genre awareness. Without genre, the user is limited to the most fundamental of active choices – “What mood am I in right now?” – opening up the door to a whole new era of mood-, theme- and location-related playlisting. Mood, in effect, becomes the genre, with one active choice leading to hours of passive and lean back discovery.
From an international repertoire perspective, this is good news. As digital service providers re-tool their once-chart-focused products to include elaborate playlist-driven curation, there is an increasing need for content to populate these playlists. The Chinese music universe is, by some estimations, between 200k and 300k songs (of wildly varying quality) and the market is around 80% domestic repertoire, so there will need to be a massive influx of good quality music to satisfy this new playlist space. While hits will always remain important, it looks like playlisting may bring about the long-awaited arrival of the long tail in China, in large part from imported content.
3. Revenue reporting remains rudimental – but the ball has started rolling
China Mobile reportedly generates over $3bn a year from value-added music services, predominantly the Caller Ringback Tone (CRBT). The un-piratable nature of CRBTs that are hosted on the telcos’ servers – only to be played to a caller when waiting for the receiver to pick up – hints at a world in which consumers are prepared to pay for music when they have absolutely no alternative. The fact that only around 2% of these revenues make their way back to rights owners, despite the service being largely licensed with 50/50 revenue share agreements in place, hints more directly at the black box nature of digital licensing in China. Top tier Chinese pop stars and major pop catalogues are essential for China Mobile and are therefore treated to occasional paydays – but the rest are left picking up scraps.
Meanwhile, in the online/app space, we have seen a handful of strong, ad-supported streaming services emerge – e.g. QQ Music, Kugou, Kuwo, Baidu Music, Xiami, Douban, Netease, Nokia’sMixRadio etc. – all of which now have solid apps launched. A still often-cited IFPI figure is that China is a 99% digital piracy market, but the last few years has seen these online services make progressive steps. In most cases they will have the international majors and domestic majors licensed, paying advances and minimum guarantees crudely based on market share. There is, however, very rarely any backend reporting; and when there is, it typically suggests the advances weren’t recouped, resigning content providers to accept advances as annually renewed buyouts. In both mobile and online we are still some distance from realistic transactional reporting, but the money has at least started coming in.
4. Signs of reform in video. Is music next?
As minimum wages rise and exports soften, China’s glory days as the factory of the world are looking decidedly limited. The new regime, however, is increasingly aware of the importance of patents, IP, and innovation in a post-manufacturing economy as the country is trying to move up the value chain. While China already has a recognisable legal infrastructure in place relating to copyright, it is also taking steps to further reform the law as we speak.
The issue in the past has always been enforcement. So while there are DMCA-like takedown provisions within existing Chinese law, the proof of ownership has always been so onerous and the re-posting of infringing content so fast that this has been a losing battle.
A quick look at the online video space gives cause for hope. The government sees its domestic film industry as a shining star of this new economy and, perhaps as importantly, its soft power abroad (note China’s recent wins at the Berlin Film Festival) and has shone its light onto the film and video industry as a whole. Online, where there was once a total ubiquity of video content – meaning it was almost impossible for the major video portals to differentiate themselves from each other – we now see the platforms securing exclusive licenses to premium content, then protecting that exclusivity via takedowns. This is a boon for video content owners who still enjoy somewhat of a ‘licensing bubble’.
When combined with the portals’ concern that advertisers were potentially pulling out due to contributory copyright infringement lawsuits, we see a market that has effectively self-regulated for purely commercial reasons, but only made possible with the eventual support of the government and the enforcement of latent copyright laws. The question is this: is the music industry next in line for this kind of reform?
5. What next?
In the first half of 2013, we saw a number of the major digital services add paid premium tiers into their offering in order to satisfy contractual obligations with content providers – typically at a cost of 5-10RMB/month ($0.8-1.6/month) for added mobility, higher audio quality, downloads and exclusive content. Three years ago this would have been a laughable proposition – charging the consumer for access to music – and while the take up of these premium tiers is by all accounts “negligible”, the concept of premium music is now at least on the consumers’ radar.
Meanwhile, behind the scenes, we are seeing competition and consolidation similar to the online video market of yesteryear. As the CEO of music service Xiami memorably phrased it, “independent copyright fiefdoms” are emerging: vast pools of exclusive rights being built up by big industry players like Tencent, China Music Corporation and Alibaba (who recently bought Xiami). Tencent, the parent company of market leading streaming service QQ Music, also now doubles as one of the largest digital aggregators in China and is actively protecting its exclusive rights – e.g. suing rival DSP Kuwo within the last couple of months.
It is impossible to make a concerted switch into a paying model when there are hundreds of sites with freely available music. While there are definitely fierce rivalries at play here, the key stakeholders are making an aligned move towards addressing this, including setting up bodies like the Alliance of the Digital Music Industry (ADMI), representing both content and service providers.
In the next few years, we will see these few major players – with the support of the government – being able to shut down or license any rogue sites or apps, leaving a handful of services who will in turn most likely have been consolidated into one of the fiefdoms. At this point, with the market largely under control, there will be a concerted push towards more realistic freemium structures in which paying money does actually add value. It is worth noting that the online video services have succeeded to the degree where they have now introduced pay-per-view elements to some TV shows and films.
Another area to watch is mobile data bundling, which is shaping up to be the new battleground for music industry value. As government-owned companies, the imperative for the three large telcos is not necessarily revenues – it is customer acquisition. As we move into 4G, and content is consumed increasingly voraciously via mobile, it is the highly desirable 31m-strong university student demographic (source: National Bureau of Statistics and based on 2010 numbers) who see the most value in unlimited data packages surrounding their favourite music services. China Unicom, for example, has these packages for Douban, Xiami and Duomi, among others, with a reported 50/50 deal with the digital services.